1. Field of the Invention
The present invention relates to computer-based systems for trading financial instruments. More specifically, the present invention relates to a method and an apparatus that uses digital signatures in validating trading and settlement operations involved in a financial transaction, such as a foreign exchange transaction.
2. Related Art
The foreign exchange market is the largest and most liquid market in the world. In 1998, the Federal Reserve Bank of New York estimated, that daily turnover was approximately $1.5 trillion.
Unlike stocks, which are market-traded, foreign exchange is primarily an over-the-counter market. There is no such thing as a xe2x80x9cpricexe2x80x9d for a particular transaction. Rather, each dealer, bank, broker, or other trading source, provides their own rate for each transaction.
The trading and settlement processes for a typical foreign exchange transaction are illustrated in FIG. 1. A trader 102, working on behalf of a corporation or other entity, makes a quote request 106 to a trader 104, working on behalf of a bank. In response to this quote request, trader 104 makes a quote 108 proposing a rate for the transaction.
Trader 102 accepts the quote by sending an acceptance message to trader 104, in which case trader 104 typically sends an acknowledgement message 112 back to trader 102.
Note that the communication process outlined above typically takes place over the telephone or via facsimile.
After traders 102 and 104 agree to the terms of the transaction, trader 102 communicates trade information to settlement clerk 118, who works on behalf of the same organization as trader 102. Similarly, trader 104 communicates trade information 116 to settlement clerk 120, who works on behalf of the same organization as trader 104.
Settlement clerks 118 and 120 are responsible for actually causing funds to be transferred between accounts of the two organizations involved in the trade. Before doing so, settlement clerks 118 and 120 communicate and confirm settlement information 122 with each other. This settlement information 122 confirms the terms of the trade, and additionally specifies the accounts between which funds are to be transferred.
Note that settlement clerks 118 and 120 typically communicate settlement information 122 via telephone or facsimile. In some cases, this settlement information is communicated through a third party payment matching system 128.
After the settlement information is communicated, and if the terms of the deal are in agreement, settlement clerk 118 communicates with funds transfer agent 126, who actually transfers the funds. Similarly, settlement clerk 120 communicates with funds transfer agent 124 to transfer funds in the reverse direction.
Note that the separation of roles between trading and settlement provides a measure of protection against fraud because collusion between a trader and a settlement clerk is required to perpetrate most types of fraud. However, this protection has a price, because the many manual communications, validations, and confirmations involved in the role-based trading and settlement processes are time-consuming and expensive.
Also note that the trade terms and settlement instructions are typically entered manually on both sides of the transaction. Consequently, the trade terms and settlement instructions are often not entered in the same way, and may not match. Even if the trade terms and settlement instructions are entered properly, netting and aggregation can cause trades not to match. If trades do not match, a great amount of additional work is required to sort out inconsistencies.
What is needed is a method and an apparatus for facilitating trading and settlement of financial instruments, such as currencies, without the time-consuming manual processes involved in existing trading, settlement, and confirmation processes.
One embodiment of the present invention provides a system that uses digital signatures in performing validations to facilitate a trade. This system operates by receiving a quote related to the trade at a first computer system, wherein the quote includes signed permission information that facilitates verifying permissions that have been granted to a quote maker. Upon receiving the quote, the system validates that the quote maker digitally signed the quote by using a public key of the quote maker to verify that the quote was signed by a corresponding private key belonging to the quote maker. The system also validates that the quote maker has permission to perform the trade by using a public key of a first security officer to verify that the permission information was signed by a corresponding private key belonging to the first security officer, thereby authorizing the quote maker to perform the trade. The system records acceptance of the quote by signing appropriate fields of the quote with a private key belonging to a quote receiver, and communicating a trade record, including the signed quote, to the quote maker.
In one embodiment of the present invention, the system additionally validates the identity of the quote maker and quote receiver by using a public key of a certification authority to verify that a certificate containing the public key of the quote maker or quote receiver was signed by a corresponding private key belonging to the certification authority. Note that signing by the certification authority indicates that the certification authority has verified the identity of the quote maker and quote receiver.
In one embodiment of the present invention, the quote includes multiple quotes from multiple quote makers, which have been aggregated into by a trade facilitator.
In one embodiment of the present invention, communicating the trade record to the quote maker involves sending the trade record to the trade facilitator, who forwards the trade record to the quote maker.
In one embodiment of the present invention, prior to receiving the quote at the first computer system, the system communicates a quote request from the quote receiver to the quote maker. This quote request includes information that allows the quote maker to validate the identity of the quote receiver. It also includes information that allows the quote maker to validate that the quote receiver has permission to perform the trade by using a public key of a second security officer associated with the quote receiver to verify that permission information within the quote request was signed by a corresponding private key belonging to the second security officer, thereby authorizing the quote receiver to perform the trade.
In one embodiment of the present invention, in accepting the quote, the system additionally sends the trade record to a settlement clerk associated with the quote receiver who is responsible for settling the trade.
In one embodiment of the present invention, prior to receiving the quote, the system allows the quote maker to obtain permission to make the trade. The quote maker does so by sending a request for permission to the first security officer associated with the quote maker. This allows the first security officer to digitally sign a permission record to indicate the quote maker has permission to trade.
In one embodiment of the present invention, the trade involves foreign exchange and the trade record includes: a trade date, an identifier for a first currency, a first currency amount, an identifier for a first organization providing the first currency, an identifier for a second currency, a second currency amount, and an identifier for a second organization providing the second currency.
One embodiment of the present invention provides a system that uses digital signatures in performing validations to facilitate a trade. This system operates by receiving a trade record from a quote receiver who has accepted a quote and has thereby created the trade. This trade record is received by a first settlement clerk associated with the quote receiver, who is responsible for settling the trade. Next, the system augments the trade record with settlement instructions identifying at least one account to be used in settling the trade, and then signs the relevant fields of the trade record with a private key belonging to the first settlement clerk. The system then communicates the trade record to a second settlement clerk associated with a quote maker.
In one embodiment of the present invention, upon receiving the trade record at the second settlement clerk, the system uses a public key belonging to the first settlement clerk to validate that the first settlement clerk has signed the relevant fields of the trade record. The system also validates that the first settlement clerk has been granted permission to settle the trade by examining permission information contained within the trade record to verify that a first security officer associated with the first settlement clerk has digitally signed the permission information, thereby authorizing the first settlement clerk to settle the trade. Next, the system communicates the trade to a funds transfer agent to carry out the trade.
In one embodiment of the present invention, communicating the trade record to the second settlement clerk involves sending the trade record to a trade facilitator. This trade facilitator augments the trade record with the permission information for the first settlement clerk, and then forwards the trade record to the second settlement clerk.
In one embodiment of the present invention, the settlement instructions include: an identifier for a first account belonging to the first organization; and an identifier for a second account belonging to the second organization.
One embodiment of the present invention provides a system that uses digital signatures in performing validations to facilitate a trade. This system operates by receiving a quote request from a quote requester at a computer system belonging to a trade facilitator. Next, the system looks up a trading permission for the quote requester from a database maintained by the trade facilitator, and appends the trading permission to the quote request to form a trade record. Next, the system communicates the trade record to potential quoting entities.
Upon receiving quotes from the potential quoting entities, the system augments the trade record to include the quotes, and then sends the augmented trade record to the quote requester.
In one embodiment of the present invention, the system additionally receives a selection of a quote from the quote requester, and notifies each of the quoting entities about whether the quote they made was selected.
In one embodiment of the present invention, the system receives a trade record from a first settlement clerk associated with the quote requester. This record includes settlement instructions appended to the trade record by the first settlement clerk. Upon receiving the trade record, the system looks up permission information for the first settlement clerk in a database, and then augments the trade record with the permission information for the first settlement clerk. Next, the system forwards the trade record to a second settlement clerk associated with a quote maker. This allows the second settlement clerk to validate the permission information by verifying that the permission information was signed with a private key belonging to a first security officer associated with the first settlement clerk, thereby authorizing the first settlement clerk to settle the trade.
Note that in the case that all permissions and signatures are valid, the first and second settlement clerks may be reliably replaced by automated processes, reserving human intervention for the exceptional cases.